Is Having a Residual a Good Idea?

Is Having a Residual a Good Idea?

There are many factors to consider when financing equipment and whether to have a residual or not is one of those.

Before the change in the accounting procedures the ATO would set a residual which was supposed to reflect the value of the goods at the end of the contracted period eg: a new $40,000.00 motor vehicle should under normal conditions be worth 37.5% of its value after 48 months.

This treatment of a residual still holds good today in relation to a novated motor vehicle lease.

The ATO will not accept a very low residual as this means you are claiming and writing off more, and the value of the “buy back” is low. The exception to the basic rule only occurs in exceptional circumstances eg: a car doing exceedingly high kilometres or being subject to extremely adverse conditions such as an oyster famer who backs his ute into salt water and carts salty produce on the tray.

On the other side of the residual issue is what the lender will accept. Again, if we look at a motor vehicle doing normal annual kilometres and you want an 80% residual over 5 years the ATO would accept this, (because your tax write off is low) but the lender would not as the value of the goods will not cover the residual at the end of the contract.

While we must accept what the lender and ATO require the most important thing is what do you want and / or need.

Some of the things that you should consider when looking at a loan with or without a residual?

What will the goods be used for?

Is it doing easy work or hard work (eg: an excavator hammering rock or digging top soil)

Are you intending to keep the goods for a while after the contract finishes

On completion of a loan are you going to trade the goods in

Do you have the ability to do repairs yourself or do you have to pay someone

Affordability

When it comes to having or not having a residual in addition to what is written above, you should discuss these and other issues with a trusted adviser who has your best interest at heart.

A dealer only wants to sell the product whereas we want to assist with this deal and the next and the next whether it be finance for a car, truck, excavator, paver or a plane. Talk to us at Hunter Business Finance to get a reliable and realistic understanding of what is available and what is in your best interest.